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American Power Corp (AMPW.OB): Smoke and Mirrors

Quick Stats
Ticker AMPW
Share Price $1.57
Market Cap $142 million
$ traded/day $1.1 million
Borrow Cost -9.4%
Borrow Difficulty Hard
Est. Short Interest (Dec 2010) 47,500
Days to Cover 0.2

Thesis
American Power Corp (AMPW:OTCBB) is an $142 million market cap exploration-stage coal company that uses smoke-and-mirror agreements to obscure its lack of real assets or capital. It’s another stock promotion that I believe will go to zero sooner or later. The promoter and majority shareholder of AMPW, Johannes Petersen, also promotes another penny stock, (SILA:OTCBB) which has declined from $1.40 to $0.22.
What does AMPW own?
I estimate a current cash balance of $600k minus promotional expenses over the past quarter. A property in Montana is being held in escrow until the company delivers $1.2 mn in cash and certain documents (reserve estimate and mining feasibility study) to the sellers.
The Property Scheme
The company signed the following agreements in April 2010:
•$700k to acquire 40% of a “coal property” in Montana, with a call option on the remaining 60% struck at $1.25mn.
•$700k to acquire 40% of a “mineral rights property” in Montana, with a call option on the remaining 60% struck at $1.25mn.
Deal issues:
•It’s a seller-financed deal. The company only invested $200k total up-front. If these properties have any value, why is the seller giving away a huge option to the buyers? Would you give 20x leverage to a company with no real assets at a 5% interest rate with an interest waiver for the first two years?
•The company has invested $800k so far over the past 9 months (call it a time-weighted 4.5 month investment period.) The notion that these assets are worth $142mn today, is simply not credible.
•SILA has similar option arrangements to purchase properties
My opinion:
The property is worthless.
The Capital Scheme
On Sep 10, 2010, AMPW entered two agreements with a Marshall Islands corporation named Black Sands Holdings, Inc. (BSH).
•AMPW issued BSH ~417k shares to settle an obligation of ~$208.5k
•BSH granted a “put” option to AMPW to issue Units (1 Unit = 1 share + 1 warrant) to BSH for up to $10 million, priced on a 10-day VWAP formula. Exercise is limited to $1 million per 3 months.
I think the implication (what we are supposed to believe) is that the settlement priced stock at a generous level to BSH and BSH in return issued this put option to AMPW as a “fair trade”.
Deal issues:
•Both agreements are ridiculously favorable to AMPW: There was roughly zero asset value in AMPW prior to Sep 10, and who writes a put struck at VWAP with a penny stock promoter on the other side?
•The value of a long-term, $10 million option is not in the same ballpark as the $200k obligation
•Why are the two agreements separate? I'm not sure the option contract is even legally binding, as there is no consideration due to BSH
•SILA has a similar “put option” agreement with another mysterious offshore entity
My opinion:
BSH is likely to be owned by the promoters or their affiliates.
Note: On Oct 5, 2010, AMPW issued ~600k Units to BSH for $500k, outside of the option agreement.
Promotional actions/statements:
The most recent press releases from the company are:
•2/1/11--Company has retained a small investment bank to explore strategic alternatives
•1/4/11--Paid research report put out by Cohen Independent Research Group (their disclaimers state that they receive compensation… I love the asterisk next to “Independent Research” on their website)
•12/13/10—“American Power Corp. Well Financed to Advance Pace Coal Project”—announcing the BSH put option deal, which they call a “financing” with a “European institutional investor”
•12/7/10—“American Power Corp. Pace Project Update”—Company announces that it has retained Mission Engineering of Billings, Montana to prepare a permit application. The CEO makes some non-sequitur comments about Western Coal and Riversdale being taken out at $3bn+ each.
I’d also recommend checking out the company’s website, www.americanpowerco.com/. It’s extremely flashy, appeals to patriotism with a huge American flag, and even plays up an emerging market angle (“Powering Asia”) by citing trade statistics.
Management
Johannes Petersen, the CFO, owned 52.6% of the stock at Sep. 30 (market value ~$72mn today).
Other public company associations:
•CEO, Century Petroleum (CYPE:PINK-$0.01)
•CEO, Paloma Resources (PLO-H:Venture-$0.15, C$1.2mn mkt cap)
•CEO, Gold American Mining Corp (SILA:OTCBB-$0.22)
•Former CFO, American Sierra Gold Corp (AMNP:OTCBB-$0.04, $2.7mn mkt cap)
•Former CEO, Dragon Gold Resources (sold as a shell for an RTO in 2007)
Alvaro Valencia, the CEO, went to the same college in Peru as Petersen and owned 0.2% of the stock at Sep. 30.
Conclusion
I believe this stock is worthless. Short selling may be difficult due to borrow issues and the skill of the promoters. Nevertheless, the longs should beware.
Disclaimer: The information and opinions presented in this article are provided for informational purposes only, and do not constitute investment advice. Securities investing involves a high degree of risk. Potential investors should seek the advice of a professional before engaging in any investing or trading activity. The author of this article and/or his affiliates have a position in the securities mentioned in this article at the time of publication. The author and/or his affiliates may change their position at any time without disclosure.